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Insurance Invoice not yet paid - How to treat - accrued expense?

AJ Jem's Profile

accounting for insurance premiumsOur company received an insurance invoice at Jan 2014 for period covering Feb 2014 - jan 2015. we're in March 2014 but we were short in cash so we didn't pay the invoice yet (yes it's over due). We know it's an obligation and we'll need to pay for it but my question is at march 2014, how do you account for this transaction on our book? I know we have to accrue an expense for Feb and march 2014 and debit expense for those two months but what do we do with the remaining months? We can't credit accrued expense for the full amount and debit expense because as we know insurance doesn't expire in one month (it's 12 months cover period) so how do you record this obligation on your book until you pay it? I know once we pay we hit prepaid and accrued expense and amortize it monthly. Thanks.

Answers

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Original Entry for Insurance:

Prepaid Insur $xxx
A/P $xxxx

First month it is used (and there after total amt/number of months):

Insurance Expense $yyyy
PrePaid Insur $yyyy

When you pay the insurance (assuming they didn't cancel the policy)

A/P $xxxxxx
Cash $xxxxxx

AJ Jem
Title: Sr. Accountant
Company: not disclose
(Sr. Accountant, not disclose) |

Wayne, thanks for the response but how do you have prepaid and AP in the same entry though? for me I see those two accounts working completely different ways(prepaid is you're saying you paid in advance but AP is you're saying you have an obligation that you have not paid yet). so explain to me why we would increase an asset (debit prepaid) for item we didn't pay yet? I understand the increase in AP would wash it off but it sounds to me two wrongs don't make one right. when if I was to increase my revenue by 2billion and offset that 2 billion by increasing an expense, is that an appropriate accounting practice? can we have an contra AP account within a liability to offset the AP? thanks

Sarah Jackson
Title: Associate Editor
Company: Proformative
(Associate Editor, Proformative) |

Proformative offers 400+ business courses with free CPE, many on Accounting.

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

I disagree with Wayne (sorry Wayne :-) ) on this one. It boils down to how "stringent" your invoice recognition/record keeping are and how you can adopt your procedures/systems to reflect the real nature of the transaction/s.

His original entry to Prepaid Insurance contra AP does not represent the context of a "prepaid" account. (the entry just rubs me wrong). I would expense the monthly insurance and credit A/P for now and when you are ready to pay, you can debit AP. You can match the invoice with the total AP+prepaid insurance.

Month unpaid....
DR Insurance expense
CR A/P

When you pay the remainder of the insurance premium and total A/P
DR Prepaid Insurance (remaining number of months)
DR A/P (Total unpaid insurance to date)
CR Cash (equivalent to total amount of invoice)

AJ Jem
Title: Sr. Accountant
Company: not disclose
(Sr. Accountant, not disclose) |

thanks Emerson, so we don't record the full invoice amount (minus the Feb and march already incurred cost) in our book until we pay it (I assume next month) and the entry would be debit prepaid for the (10 months remaining period) and credit cash ?

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

YES! Stick to the real "nature" of the transaction/s and accounts.

AJ Jem
Title: Sr. Accountant
Company: not disclose
(Sr. Accountant, not disclose) |

Emerson, but how do we then reflect our obligation for this invoice ? isn't it still an obligation to our company (we do have to pay the insurance folks)

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

You are recognizing your monthly expense and the extent of your obligation. Your obligation is NOT the yearly invoice but the "temporary" monthly coverage. Just make sure that you are still COVERED.

AJ Jem
Title: Sr. Accountant
Company: not disclose
(Sr. Accountant, not disclose) |

no insurance didn't cancel yet and I assume it will get paid next month (they worked it out with the insurance folks)

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Sorry guys - spacing did work.

First entry is debit
second is credit

so

debit prepaid
credit a/p

EMERSON GALFO
Title: CFO
Company: C-Suite Services
LinkedIn Profile
(CFO, C-Suite Services) |

That is why you are still recognizing the current month's insurance expense and crediting AP

Randy Moore
Title: CFO
Company: SJB Bagel Makers
(CFO, SJB Bagel Makers) |

You do not debit the prepaid account until it is paid. Unpaid is not prepaid.

I agree with Emerson's entries:
Month unpaid....
DR Insurance expense
CR A/P

When you pay the remainder of the insurance premium and total A/P
DR Prepaid Insurance (remaining number of months)
DR A/P (Total unpaid insurance to date)
CR Cash (equivalent to total amount of invoice)

Linda StClaire
Title: VP Finance
Company: Extron Inc.
(VP Finance, Extron Inc.) |

I'm with Wayne on this one: if you are billed annually you need to record the liability as a payable as of the date the invoice is presented, offsetting the prepaid account (indeed a quasi contra liability account). This records the liability to the insurance company immediately as invoiced, but at this point does not post any expenses:

DR Prepaid
CR AP

For each month the insurance covers an entry would be made to reduce the prepaid account and record the expense to the correct period:

DR Insurance Expense
CR Prepaid
Making sure to record the entries for the months that have already passed, until the prepaid account is depleted.

On the other hand, if a company is in a tight cash situation, insurance companies will almost always (for a fee) allow a (monthly) payment plan, rather than demanding the entire bill at once, and frankly this is where I would start: contacting the insurance company and explaining the situation. Making contact prior to a cancellation notice, will give you more credibility and the insurance company likely to make arrangements for you.

A pro-active call to any creditor is of tremendous value that is often over looked. It shows that the company recognizes their liability and wants to make things right, but needs additional time. However, if a payment plan is made, it is critical that it is kept or all your credibility goes out the window. Even if a payment is going to be one week late, this should prompt a call (emails just don't work as well in debt negotiations) to the creditor immediately. Keep them informed and they will work with you, usually.

S McDowell
Title: Controller
Company: SCI Electronics
LinkedIn Profile
(Controller, SCI Electronics) |

Wayne and Linda are correct. The balance sheet needs to reflect all contractual liabilities at their full cost unless there is a contingency that makes it unlikely to occur. This liability doesn't appear to have any contingency, except the insuree not paying it, and needs to be reflected in full on the. BS. The Cr to A/P shows the UNPAID amount.

AJ Jem
Title: Sr. Accountant
Company: not disclose
(Sr. Accountant, not disclose) |

The way I see it is that Insurance payment is booked in the asset only because it's paid in advance (annual payment) otherwise it would have been treated like an ordinary expense (if we were to pay it monthly) so if there is no payment at this point why should we book it to prepaid asset account? the insurance policy is still effective but only under one condition which is my company pays the bill in full in 15 days (they did work it out with the insurance folks and they were nice enough to work with us) but if my company can't pay that invoice in 15 days the insurance policy will be cancelled so my point is that booking it to prepaid is misleading because you're assuming it's guaranteed it will be paid with in the same period right? i'm leaning towards don't book this until you pay it or intent to pay it within the same period (before month end). do you know of any GAAP citation for such issue?

Ken Mason
Title: Controller
Company: Pascua Yaqui Tribe
LinkedIn Profile
(Controller, Pascua Yaqui Tribe) |

I agree that there is no prepaid expense until the invoice is paid because the company can cancel for non-payment; therefore there is not a contractual obligation. The best entries until that time are:

1. Debit insurance expense for x months in the new policy period, credit accrued payables
2. Auto-reverse the entry on the first of the next month
3. Repeat 1-2 as necessary
4. When the invoice is entered, debit insurance expense for x months in the new policy period with the balance debited to prepaid insurance

I make it a practice to reverse everything that I accrue with subsequent accruals for cumulative amounts. It is the cleanest way for audit trail and helps ensure that no accruals are left hanging on the books.

Syed Abid Saeed
Title: manager accounts
Company: t ent pvt ltd
(manager accounts, t ent pvt ltd) |

Hi Friend,
make this entry,..
Insurance exp Dr. (sy$1000)
Insurance Payable/Accrued Ins. Cr. $1000
explanation actually accounting treat accrued as liability, which will be payable in future.
when you paid later, passed this entry

Insurance Payable/Accrued Ins. Dr.

Syed Abid Saeed
Title: manager accounts
Company: t ent pvt ltd
(manager accounts, t ent pvt ltd) |

Hi Friend,
make this entry,..
Insurance exp Dr. (sy$1000)
Insurance Payable/Accrued Ins. Cr. $1000
explanation actually accounting treat accrued as liability, which will be payable in future.
when you paid later, passed this entry

Insurance Payable/Accrued Ins. Dr.
Cash/Bank Cr.

so finally affect will be "ins.exp Dr. and Cash Cr." which is real entry passed and cancelling affect of "insurance payable/accrued Account" on Financial statement.

Kevin Roones
Title: Senior Accounting Professional
Company: In-between
(Senior Accounting Professional, In-between) |

If you have an invoice from the insurance provider then presumably you have a signed agreement somewhere, which creates a contractual obligation. I don't see any issue with Dr. Prepaid Insurance and Cr. A/P, and then Dr. Insurance Expense each month and Cr. the Prepaid account.

Invoices are entered into A/P all the time that are not paid immediately. That is why there is a separate entry debiting A/P and crediting Cash when checks are cut.

If the coverage were to be terminated down the road for non-payment then you would record the appropriate adjusting entries.

Debbie McGrath
Title: Financial Advisor
Company: Auckland Council
(Financial Advisor, Auckland Council) |

The way that we handle it in NZ is:
1. Dr Insurance
Cr Accruals
Cumulatively every month until invoice is paid
(this is automatically reversed on the first of every month)

2 Do normal payment transaction (for the total invoice) debiting the total invoice value to Insurance

3. Journal total prepaid amount
Dr Prepayments
Cr Insurance
(as a permanent NOT reversing journal)

4. Then every month until fully expensed
Dr Insurance
Cr Prepayments
(again, permanent journal NOT reversing)

This means
(a) vendor's account correctly shows the total invoice paid
(b) at any given time your expenses show the value of the insurance at that time
(c) your balance sheet shows either your liability (until you have paid) or your asset for the prepaid amount until the full period of the cover is up.

As we operate on a full accrual system, we use this method to spread the cost for pretty much anything over $500 a month that we prepay - insurance, subscriptions, membership fees, even travel paid at time of booking.
- you will just need to make sure that you keep your balance sheet reconciliations up to date.

Hope this helps

Topic Expert
Wayne Spivak
Title: President & CFO
Company: SBAConsulting.com
LinkedIn Profile
(President & CFO, SBAConsulting.com) |

Debbie,

Why as little as $500? Isn't that (IMHO) extreme and making a lot of work for yourself? Is $500 that material in the nature of your business?

In other words, is $500 material enough that $41 a month will change the profitability of the company (or conversely an additional $459)?

Romin Nabiey, CPA
Title: Corporate Controller
Company: GoodRx
(Corporate Controller, GoodRx) |

Dealt with this quite a bit, here's my take:

1. Do not book to prepaid until paid
2. Record to AP upon receipt
3. Offset to "Other Current Assets" as the services/goods owed to you represent a future economic benefit
4. Once paid, transfer net book value to prepaid account and amortize as usual

Entries:
Upon Receipt of Invoice
Dr. Other Current Assets $XXX
Cr. Accounts Payable ($XXX)

Each month of amortization
Dr. Expense
Cr. Other Current Assets

Upon payment
Dr. Prepaid (at net value)
Cr. Other Current Assets (at net value)

I believe this represents the underlying nature of the transaction best at each period in time.

Moch Warsidi
Title: Faculty Staff
Company: University of Jenderal Soedirman
(Faculty Staff, University of Jenderal Soedirman) |

You just need to debit and credit these account at the end of each month:

Dr. Insurance Expense (P/L) XXX
Cr. Accounts Payable (L) XXX

The dollars recorded is the ammount of insurance expense for the month.

When you paid the invoice:

Dr. Prepaid Insurance (A) XXX (for unexpired policy)
Dr. Accounts Payable (L) XXX (for the entire balance to make it zero)
Cr. Cash (A) XXX (for the cash paid)

After the payment, you make the following journal entry at the end of each period:

Dr. Insurance Expense (P/L) XXX
Cr. Prepaid Insurance (A) XXX (for unexpired policy)

You might check this out to find out more detailed explanation:
http://www.warsidi.com/2017/02/how-to-debit-credit-prepaid-insurance.html

Anonymous
(Senior GL Accountant) |

Im facing a similar problem like the issue we discuss here:

My company made an agreement "Employee Medical Insurance Contract for the year 2018" and the total amount will be paid on 4 payments "Every 3 month" according to the deal and the contract terms.
Should i account all the amount as a "prepaid expense" and credit the "A/P" although we've only paid the first installment which paid as a down payment when the deal is happen.
I was about to consider the first quarter payment ONLY as a prepaid expense and ignore the rest amount of the contract until the due date is coming and the payment is done i will account them as "prepaid" the problem is the as follows:
i received a monthly invoice cancellation for the employees who were left the company i get their money back "the full amount of the subscription" for ALL THE REMAINING YEAR "this amounts have been included in the total amount of the contract which i only recorded the first quarter"

What is the correct accounting treatment??

Timo Vikson
Title: CEO
Company: Lei Register OÜ
(CEO, Lei Register OÜ) |

If you have an invoice from the insurance provider then presumably you have a signed agreement somewhere, which creates a contractual obligation. www.registerlei.com. I don't see any issue with Dr. Prepaid Insurance and Cr. A/P, and then Dr. Insurance Expense each month and Cr. the Prepaid account.

Tonya Beck
Title: Controller
Company: Texas Meat Packers
(Controller, Texas Meat Packers) |

I thought this would lead me exactly to what I was needing but now I am more confused. I guess I just need it simplified

Example:
Insurance Policy total value is 100,00.00 Policy Period 6/1/18 - 5/31/19
Down Payment 4,000.00
9 Premium Payments @ 10,666.67

What would be my entries?

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